National Hydro Power Corporation IPO – Marginally overpriced

The Government of India’s proposal to dilute 9.5% of its stake in National Hydro Power Corporation and further issuance of 4.7% new shares is aimed at raising INR 4,000 crore which values the full equity at INR 28,000. We think this is slightly overpriced as our valuation of equity in existing projects is INR 13,400 and our equity valuation of current plus planned capacity is INR 23,000 crores, which is below the implied INR 28,000 crores as per the offer.

GOI is proposing to offload 9.5% of its 100% holding in NHPC and issue a further 4.7% of new shares in the company. (The percentages have been calculated after considering issue of new shares). The Govt is looking to raise INR 4,000 cr from this issue, which values the 100% equity of the company at roughly INR 28,000 cr.

What does NHPC do? National Hydro Power Corporation has the biggest portfolio of hydro generation assets in India (13 projects, Installed capacity of 5175 MW). The organization has the experience, expertise and organizational setup to finance, build, own and operate large hydro generation plants. The company has plans to develop another 11 projects of 4600MW by 2014.

Valuation of existing assets:

The company generated 16580 MU (million KWhr) of power in FY 2008-09. The average tariff at which it is currently selling this power is INR 1.62 per unit, which is on the lower side as compared to Power Purchase Agreements being signed today. Also, this generation translates into a current PLF (Plant Load Factor) of 40%, which is again on the lower side as compared to other commissioned large hydro plants like Baspa-II (JP Hydro)
Using 2009 numbers, total available cashflow to debt plus equity was INR 2,150 cr. Taking a EV/CF multiple of 12, which corresponds to a 8.5% WACC (weighted average cost of capital), the total valuation of existing assets is INR 26,000. Taking out current debt of 12,600 cr gives an equity valuation of INR 13,400 cr for the existing generation capacity.
For the planned capacity, let us take an aggressive 3-4 year completion of the planned 4600MW. Even if we put an equity valuation of 2 cr for this (on the higher side), the total equity valuation looks to be closer to the INR 23,000 cr mark than the implied INR 28,000 cr as per the offer.

Power tariffs and the upside: At the moment, large hydro generators get into PPAs with power distributors in the INR 3 to 4.25 per unit price range. For projects completed after 2011, they can sell 40% of the power generated as "merchant power plants", i.e using short-term purchase agreements. Considering the shortage of power in India, the realized price from this route will be much higher than the price realizable from long-term PPAs. This will certainly add to the above valuation and participating in this IPO is a way for investors to take a view of short-term power prices in the future.

Weighing all the above considerations, we find the IPO to be marginally overpriced, though we find this IPO to be far more attractive than companies like JP Hydro. However, investors who have the ablity to invest privately into large hydro plants being planned by private developers in states like HP, Uttaranchal, Arunachal and Sikkim, would be better advised to stay away from this IPO, as these private side investments would be more attractive than the NHPC IPO.
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